The book by Elena Chirkova, a well-known financial consultant, co-head of Mergers and Acquisitions and Fundraising of the Deloitte Financial Services Department, is devoted to one of the least developed aspects of corporate finance - the applicability and correct use of the comparative method in valuation. The author not only helps financial analyst to comprehend the theoretical principles of comparative valuation and the nuances of using certain comparative ratios, but also reveals the specifics of working with companies operating in emerging markets and, first of all, in Russia. The book is written on extensive practical material and contains examples from personal experience author. Is the first special study guide fully devoted to comparative evaluation and unparalleled both in Russia and in the world. The book is intended for financial analysts, financial consultants, professional appraisers, teachers and students.

1. INTRODUCTION TO THE THEORY OF MULTIPLIERS

2. WHAT MULTIPLIERS ARE, HOW THEY ARISED AND HOW THEY ARE USED

3. NUMBER OF THE MULTIPLIER

4. MULTIPLIER DENOMINator

5. "INCOME" FINANCIAL MULTIPLIERS

6. FINANCIAL INDICATORS BASED ON ASSET VALUES

7. NATURAL INDICATORS

8. FUTURE MULTIPLIERS AND GROWTH MULTIPLIERS

9. SOME SPECIAL CASES OF USING MULTIPLIERS

How to evaluate a business by analogy. Chirkova E.V.

Methodological manual on the use of comparative market coefficients in the valuation of business and securities.

M.: 2005. - 190 p.

The book by Elena Chirkova, a well-known financial consultant, co-head of M&A and fundraising at Deloitte's Financial Services Department, is devoted to one of the least developed aspects of corporate finance - the applicability and correct use of the comparative method in valuation. The author not only helps a financial analyst to understand the theoretical principles of comparative valuation and the nuances of using certain comparative ratios, but also reveals the specifics of working with companies operating in emerging markets, primarily in Russia.

The book is written on extensive practical material and contains examples from the author's personal experience. It is the first special textbook entirely devoted to comparative assessment and has no analogues both in Russia and in the world.

The book is intended for financial analysts, investment appraisers, teachers and students.

Format: djvu/zip

Size: 1.4 6 MB

/ Download file

CONTENT
Preface 7
Opening remarks 9
1 Introduction to the theory of multipliers 13
1.1. Terminology used 13
1.2. The concept of "multiplier" 14
1.3. Elaboration of valuation based on multiples in the financial literature and the idea behind writing this book 18
1.4. Book 22 Tasks
1.5. Disadvantages of working with databases containing information on multipliers 23
1.6. Application of the valuation method based on multiples 25
1.7. "Limitations" of the multiplier valuation method 29
1.8. The place of comparative evaluation in the classification of evaluation methods 34
1.9. Summary 37
2. What are multipliers, how did they arise and how are they used 39
2.1. "One Hundred Thousand Whys" - about animators 39
2.2. The logic of multipliers on the example of the indicator "price / net profit" 40
2.3. Summary 46
3 Multiplier numerator 47
3.1. The price of one share or 100% of the shares? 47
3.2. With or without options? 49
3.3. Market capitalization or business value? ... 52
3.4. Quotes or prices big deals? 57
3.5. Transaction prices for closed or public companies? 62
3.6. Asset prices 65
3.7. Summary 66
4 Denominator of the multiplier 68
4.1. What indicators can serve as denominators of the multiplier 68
4.2. Questions of correspondence between the numerator of the multiplier and its denominator 73
4.3. Summary 74
5 Profitable financial multipliers 75
5.1. Profit and loss statement indicators used to calculate multiples 75
5.2. Price/revenue multiplier 77
5.3. Ratio of share price to earnings before taxes, interest and amortization and operating margin 80
5.4. Multiplier "price/net profit" 84
5.5. Indicators based on cash flow 87
5.6. Price/dividend multiplier 90
5.7. Summary 94
6 Financial indicators based on the value of assets 97
6.1. Types of indicators based on the value of assets 97
6.2. Relationship between balance multipliers and yield multipliers 100
6.3. Advantages, disadvantages and applicability of balance sheet indicators 103
6.4. Summary 106
7 Natural indicators 108
7.1. Applicability of natural indicators 108
7.2. The main types of natural indicators 111
7.3. Summary 114
8 “Future multiples” and growth multiples 115
8.1. Multiples based on current share prices and future financial performance 115
8.2. Multipliers using growth rates 119
8.3. Multiples based on future stock prices 121
8.4. Summary 129
9 Some special uses of multipliers 131
9.1. Using multipliers when attracting loan financing 131
9.2. Using multipliers when calculating the residual value of a business 137
9.3. Using multiples to express business value as a formula 144
9.4. Summary 146
10 Selection of analogues 148
10.1. Key factors influencing the choice of analogues 148
10.2. Country factor 149
10.3. Industry factor 152
10.4. Time factor 155
10.5. Other factors 161
10.6. Summary 164
11 Methods for calculating multipliers and their applicability 166
11.1. Palette of methods for calculating multipliers 166
11.2. Methods for calculating the average value of the multiplier 167
11.3. Regression Equation 169
11.4. Industry applicability of methods 174
11.5. Summary 176
12. Comparability of companies from developed and emerging markets: calculations and interpretations 177
12.1. Causes of Valuation Gap: Difference in Business Returns 178
12.2. Causes of the Valuation Gap: Differences in Expected Growth Rates 179
13 Instead of a conclusion 184
Answers to test questions 187
List of used abbreviations 192

Elena Vladimirovna Chirkova

How to Valuate a Business by Analogy: A Guide to Using Comparative Market Ratios

How to Valuate a Business by Analogy: A Guide to Using Comparative Market Ratios
Elena Vladimirovna Chirkova

The book by well-known finance specialist Elena Chirkova is devoted to one of the least developed aspects of corporate finance - the applicability and correct use of the comparative method in valuation. The author not only helps a financial analyst to understand the theoretical principles of comparative valuation and the nuances of using certain comparative ratios, but also reveals the specifics of working with companies operating in emerging markets, primarily in Russia.

The book is written on extensive practical material and contains examples from the author's personal experience. It is the first special textbook entirely devoted to comparative assessment and has no analogues both in Russia and in the world.

4th edition, revised and enlarged.

Elena Chirkova

How to Valuate a Business by Analogy: A Guide to Using Comparative Market Ratios

Editor Vyacheslav Ionov

Editor-in-Chief S. Turco

Project Manager O. Ravdanis

Proofreader E. Chudinova

Computer layout A. Abramov

Cover design by A. Bondarenko

The cover design uses an image from shutterstock.com.

© Chirkova E.V., 2005

© Chirkova E.V., 2017, with changes

© Alpina Publisher LLC, 2017

All rights reserved. The work is intended solely for private use. No part electronic copy This book may not be reproduced in any form or by any means, including posting on the Internet and corporate networks, for public or collective use without the written permission of the copyright owner. For copyright infringement, the legislation provides for the payment of compensation to the copyright holder in the amount of up to 5 million rubles (Article 49 of the zoap), as well as criminal liability in the form of imprisonment for up to 6 years (Article 146 of the Criminal Code of the Russian Federation).

- Well, OK! Marya Nikolaevna finally decided. - I now know your estate ... no worse than you. What price will you put per soul? (At that time, the prices of estates, as you know, were determined by the soul.)

"Yes... I suppose... you can't take less than five hundred rubles," Sanin said with difficulty.

I.S. Turgenev. spring waters

Sometimes there's more to stock valuation than a price-to-earnings ratio.

Warren Buffett
Letter to Berkshire Hathaway Shareholders, 1988

introduction

Dear readers! I am pleased to present to you the fourth edition of my book. I started developing the topic of valuation using comparative market ratios (or multipliers) from a methodological standpoint back in 2000, when, while working in the investment banking division of an investment company, I realized that the theoretical knowledge that can be gleaned from classic financial textbooks is clearly not enough . Each time we had to think of something, to guess about something, to rest against the impossibility of giving a reasonable interpretation of the results obtained, etc. For example, we all the time faced a huge (twice or more) gap in the company's valuation when using different multipliers , and the question constantly arose which of the estimates is closer to the truth. It was then that I began to systematize the evaluation work carried out by me and my colleagues and the results obtained in the course of it and “finish” for myself the theory of comparative coefficients, very sparingly presented in finance textbooks.

Since then, little has changed. None of the currently available open sources provides the necessary amount of knowledge for the practical mastery of the entire range of assessment methods, taking into account the nuances of applying each of them. Much knowledge is only "in the heads" of practitioners and is transmitted literally from mouth to mouth. And this circumstance creates a serious problem in raising the qualifications of financial analysts.

The realization that there is no systematic manual for such an important practical aspect of financial analytical work, combined with my personal experience, prompted me to write this book. It is based on the knowledge gained by me over several years of consulting and investment banking practice; most of the examples in the book are actual calculations made by the team I worked with on projects, or calculations I encountered while on the "other side" of the deal...

I see my goal in providing financial analysts with theoretical knowledge and on their basis to gain practical skills necessary in order to:

Determine the appropriateness of using multiplier valuation in each specific case and understand when it is preferable to use which valuation method;

Choose the multipliers that are most suitable for evaluating a particular company;

Competently calculate the values ​​of multipliers;

To be able to interpret the results obtained in the assessment by multipliers, i.e. to understand all the distortions and errors associated with the use of this assessment method.

Thus, we will talk about the limits of applicability of the method. All the steps described below are aimed at obtaining a more accurate assessment of both companies and their securities, the importance of which is invaluable when making an investment decision.

You have probably already noticed the second epigraph, which seems to contradict the content of the book. It would seem that if the author is going to talk about the use of comparative market coefficients (multipliers) in the assessment, then why include in the epigraph the phrase according to which the assessment should go beyond the scope of their calculation? In fact, there is no contradiction, because the purpose of this methodological manual is precisely to teach you the creative and meaningful use of multiples to value companies and show that the simplest comparisons do not always lead to the desired result.

In choosing the style of presentation for my book, I focused on readers with an initial financial background. To understand the text, you will need knowledge of such terms as "discount rate", "discounting", "discounted cash flow", "weighted average cost of capital", " security from fixed income”, “Gordon dividend model”, “valuation model financial assets» (capital asset pricing model - СAPM). In addition, it is necessary to have basic skills in working with financial reporting. Specialized training in the field appraisal activities not required. I expect that those who are familiar with the basics of corporate finance will understand almost every word in this book.

And now briefly about the difference between the new edition of the book and the previous one. It contains two major additions.

First. Appeared in the book new chapter- "The use of multipliers to assess the overvaluation and undervaluation of the stock market as a whole." In previous editions of the book, and in this one too, I talk a lot about the fact that multiples valuation is a relative valuation, it allows you to calculate the value of an asset based on the value of similar assets, but says nothing about whether the value of similar assets is fair, can you rely on it. This is a serious problem when estimating by multiples. It is partly solvable. Very often, the revaluation of the shares of a particular group of companies, for example, an industry one, is associated with overheating of the market as a whole. And the revaluation of the market as a whole may well be tested with the help of multiples, in particular, historical averages. This will be discussed in the next chapter.

Second. I came across the fact that, even after studying the theory, analysts do not always know where to get data for calculating multipliers - to peep possible analogue companies, analyze whether they are suitable, find transactions with similar assets, find their financial indicators, and in some cases and ready-made multipliers. Therefore, I have prepared for you a list of the main sources of information, which includes more than 20 resources both on international companies and transactions, and on Russian ones. Most of them are paid, but large companies many are signed or ready to sign if there is a need.

I also updated the statistics, made a list of sources on the topic, and made other changes that I felt were necessary.

1. Introduction to the theory of multipliers

Imagine that you want to sell your two-room apartment in Moscow in a 9-story panel house built in the 1970s. You do not trust realtors and want to evaluate it yourself first. And so you open a database of apartments for sale in your city and find that two more apartments are for sale in the immediate vicinity of your house - a “odnushka” in a 9-story brick “Stalinist” building across the street and a “three-ruble note” in a “khrushchev” in your backyard. For the first one they ask for $2500 per sq. m. m, for the second - $ 1900. You call ads, ask an agent, look at apartments and as a result you will find out the following. The area of ​​​​Stalin's "odnushka" - 36 square meters. m - quite decent for a one-room apartment, there is a combined bathroom with a window, as it is now fashionable, a large 20-meter room, a pantry, mezzanines, but the kitchen is small - only 7 sq. m. The apartment is recently renovated, "native" parquet in excellent condition. The entrance is also renovated and equipped with an intercom. A significant disadvantage is that all windows overlook a noisy avenue, although brand new double-glazed windows muffle this noise. In addition, the floors in the house are wooden, there was no overhaul of the house. The floor is the last one. "Treshka" in the "Khrushchev" - small size, only 62 square meters. m: a tiny kitchen, no auxiliary premises, the entrance is open and very dirty, there are scribbles on the walls and it smells of homeless people, there is no elevator, and the apartment is on the fourth floor, but the house is in the courtyard (all windows face the courtyard), very green and cozy. But from the bus stop further than the "Stalinka" - there it is right in front of the windows.

Based on this information, you are trying to evaluate your “kopeck piece”, which is something between a “one-room apartment” and a “three-room apartment” - a more or less normal layout, it was recently renovated, but all the windows face the avenue, and the entrance is dirty, like in the "badass". Mentally, you make a list of factors that affect the price of an apartment: the prestige of the area, proximity to transport, the material of the house (panel, brick, monolith, etc.), its number of storeys, the condition of the house (ceilings, communications, overhaul age), the condition of the entrance , neighbors (presence of communal apartments), the presence of an elevator, a garbage chute, the availability of amenities (for example, main gas or gas water heater), the floor on which the apartment is located, windows - to the courtyard or street, layout, condition of the apartment, etc., not to mention about the legal purity of documents. Having made a rough estimate, you decide to list the apartment for $2,300 per sq. m and gradually lower the price. Realistic situation, isn't it?

What we have just done is the valuation of an object (in this case, real estate) by analogy. Imagine how many factors you need to consider even to evaluate an apartment. Approximately by analogy, a business is also evaluated, only the task becomes more complex. It is more difficult to find analogues (they are not so obvious), the range of factors that affect the value is wider, it is more difficult to formulate how our analogues (each of them) differ from the company being valued and what adjustments will need to be applied. This is what this book is about. But first, a few introductory paragraphs.

1.1. Terminology used

Anyone whose activities are related to financial market, you probably heard or said yourself: “this stock is quoted at P / E ten”, “this paper is overvalued by P / S”. The foreign abbreviations P/S and P/E denote market ratios that are used to value companies and their securities.

In the English-language financial literature, I have counted at least six terms for valuation based on market ratios:

Evaluation by multipliers (from the English multiplier - multiplier), since to obtain a result, any indicator of the company is multiplied by a certain coefficient;

Valuation by the “reference” company method (guideline company), since the company being valued is compared with the reference one, the price of which is known in advance;

Evaluation by analogy (by analogy), since an analogy is drawn between the company being valued and the reference one;

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• About the book
• about the author
• Reviews (1)
• Reviews

Quote

"I would consider it very good achievement if my book would help readers develop the ability to think of the price of almost any business or stock as a formula using multiples.”
Elena Chirkova

What is How to Value a Business by Analogy: A Guide to Using Comparative Market Ratios about?

The book by well-known finance specialist Elena Chirkova is devoted to one of the least developed aspects of corporate finance - the applicability and correct use of the comparative method in valuation. The author not only helps a financial analyst to understand the theoretical principles of comparative valuation and the nuances of using certain comparative ratios, but also reveals the specifics of working with companies operating in emerging markets, primarily in Russia.

The book is written on extensive practical material and contains examples from the author's personal experience. It is the first special textbook entirely devoted to comparative assessment and has no analogues both in Russia and in the world.

Why How to Valuate a Business by Analogy: A Guide to Using Comparative Market Ratios is worth a read

• you will learn how to determine the appropriateness of using multiplier valuation in each specific case and understand when it is preferable to use which valuation method;
• you will choose the multipliers that are most suitable for evaluating a particular company;
• you will begin to correctly calculate the values ​​of multipliers;
• you will correctly assess the overvaluation / undervaluation of shares of individual companies and the stock market as a whole;
• you will be able to interpret the results obtained when estimating by multiples, i.e., to understand all the distortions and errors associated with the use of this valuation method.

Who is this book for?

The book is intended for financial analysts, investment appraisers, teachers and students.

Who is the author

Elena Chirkova — famous financier, investment banker, business valuation specialist. He teaches at the School of Finance, Faculty of Economic Sciences, National Research University Higher School of Economics. IN different time occupied the following positions: head of the department for attracting investments in the capital of the Bank of Moscow, director of the Moscow representative office investment bank Rothschild, Head of Mergers and Acquisitions at Deloitte's Financial Services Department, Vice President of the Investment Banking Department at Troika Dialog, etc. She worked at the Faculty of Economics at Harvard University. Graduate Faculty of Economics Moscow State University, postgraduate student at Claremont Graduate School (California, USA). Candidate of Economic Sciences. Author of the books Do Managers Act in the Interest of Shareholders?, Warren Buffett's Philosophy of Investing, or What Financial Guru Biographers Keep Silent About, Anatomy of a Financial Bubble, Financial Propaganda, or the Naked Investor, History of Capital from Sinbad the Sailor to The Cherry Orchard.

Www. elenachirkova.com
elenachirkova@hotmail.ru

Key Concepts

Well-known financier, investment banker, business valuation specialist. He teaches at the School of Finance, Faculty of Economic Sciences, National Research University Higher School of Economics. At various times, she held the following positions: Head of the Department for attracting investments in the capital of the Bank of Moscow, Director of the Moscow representative office of the Rothschild investment bank, Head of mergers and acquisitions of the Deloitte Financial Services Department, Vice President of the Investment Banking Department of Troika Dialog, etc. Worked for economics department at Harvard University. A graduate of the Faculty of Economics of Moscow State University, she studied at the Claremont Graduate School (California, USA) as a postgraduate student. Candidate of Economic Sciences. Author of the books “Do managers act in the interests of shareholders?”, “Warren Buffett’s philosophy of investing, or what financial guru biographers are silent about”, “Anatomy of a financial bubble”, “Financial propaganda, or the Naked investor”, “History of capital from “Sinbad the Sailor” to Cherry Orchard.

How to evaluate a business by analogy. Chirkova E.V.

Methodological manual on the use of comparative market coefficients in the valuation of business and securities.

M.: 2005. - 190 p.

The book by Elena Chirkova, a well-known financial consultant, co-head of M&A and fundraising at Deloitte's Financial Services Department, is devoted to one of the least developed aspects of corporate finance - the applicability and correct use of the comparative method in valuation. The author not only helps a financial analyst to understand the theoretical principles of comparative valuation and the nuances of using certain comparative ratios, but also reveals the specifics of working with companies operating in emerging markets, primarily in Russia.

The book is written on extensive practical material and contains examples from the author's personal experience. It is the first special textbook entirely devoted to comparative assessment and has no analogues both in Russia and in the world.

The book is intended for financial analysts, investment appraisers, teachers and students.

Format: djvu/zip

Size: 1.4 6 MB

/ Download file

CONTENT
Preface 7
Opening remarks 9
1 Introduction to the theory of multipliers 13
1.1. Terminology used 13
1.2. The concept of "multiplier" 14
1.3. Elaboration of valuation based on multiples in the financial literature and the idea behind writing this book 18
1.4. Book 22 Tasks
1.5. Disadvantages of working with databases containing information on multipliers 23
1.6. Application of the valuation method based on multiples 25
1.7. "Limitations" of the multiplier valuation method 29
1.8. The place of comparative evaluation in the classification of evaluation methods 34
1.9. Summary 37
2. What are multipliers, how did they arise and how are they used 39
2.1. "One Hundred Thousand Whys" - about animators 39
2.2. The logic of multipliers on the example of the indicator "price / net profit" 40
2.3. Summary 46
3 Multiplier numerator 47
3.1. The price of one share or 100% of the shares? 47
3.2. With or without options? 49
3.3. Market capitalization or business value? ... 52
3.4. Quotes or prices of large transactions? 57
3.5. Transaction prices for closed or public companies? 62
3.6. Asset prices 65
3.7. Summary 66
4 Denominator of the multiplier 68
4.1. What indicators can serve as denominators of the multiplier 68
4.2. Questions of correspondence between the numerator of the multiplier and its denominator 73
4.3. Summary 74
5 Profitable financial multipliers 75
5.1. Profit and loss statement indicators used to calculate multiples 75
5.2. Price/revenue multiplier 77
5.3. Ratio of share price to earnings before taxes, interest and amortization and operating margin 80
5.4. Multiplier "price/net profit" 84
5.5. Cash flow based indicators 87
5.6. Price/dividend multiplier 90
5.7. Summary 94
6 Financial indicators based on the value of assets 97
6.1. Types of indicators based on the value of assets 97
6.2. Relationship between balance multipliers and yield multipliers 100
6.3. Advantages, disadvantages and applicability of balance sheet indicators 103
6.4. Summary 106
7 Natural indicators 108
7.1. Applicability of natural indicators 108
7.2. The main types of natural indicators 111
7.3. Summary 114
8 “Future multiples” and growth multiples 115
8.1. Multiples based on current share prices and future financial performance 115
8.2. Multipliers using growth rates 119
8.3. Multiples based on future stock prices 121
8.4. Summary 129
9 Some special uses of multipliers 131
9.1. Using multipliers when attracting loan financing 131
9.2. Using multipliers when calculating the residual value of a business 137
9.3. Using multiples to express business value as a formula 144
9.4. Summary 146
10 Selection of analogues 148
10.1. Key factors influencing the choice of analogues 148
10.2. Country factor 149
10.3. Industry factor 152
10.4. Time factor 155
10.5. Other factors 161
10.6. Summary 164
11 Methods for calculating multipliers and their applicability 166
11.1. Palette of methods for calculating multipliers 166
11.2. Methods for calculating the average value of the multiplier 167
11.3. Regression Equation 169
11.4. Industry applicability of methods 174
11.5. Summary 176
12. Comparability of companies from developed and emerging markets: calculations and interpretations 177
12.1. Causes of Valuation Gap: Difference in Business Returns 178
12.2. Causes of the Valuation Gap: Differences in Expected Growth Rates 179
13 Instead of a conclusion 184
Answers to security questions 187
List of used abbreviations 192